2 fast-growing healthcare stocks for your watch list

Pulse Health Limited (ASX: PHG) acquires and operates private hospitals much like Ramsey Health Care Limited (ASX: RHC). Ramsey’s stock price is up 736.8% over the past 10 years which shows what is possible if this model is properly executed.

Pulse is much smaller than Ramsey and so lacks the significant scale advantages of its listed peer. For example, Pulse has almost no pricing power over its suppliers and corporate costs eat up most of the profits generated by its operations.

However, that looks like it might be about to change as Pulse now has 13 hospitals and surgeries in its portfolio after acquiring five facilities this year. Its existing assets could generate $13.4 million in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2017 based on current run-rates.

That’s without including any contribution from the company’s brand new Gold Coast Surgical Hospital which it commissioned on 1 September 2015. This hospital is still loss making but is expected to swing into profit in the second half of 2017.

Even without any contribution from the Gold Coast hospital, I estimate that Pulse is trading on an enterprise value-to-EBITDA multiple (EV/EBITDA) of less than 8. This is cheap enough to prompt an unnamed party to make an indicative proposal to acquire the company in recent weeks, which the board has rejected because it “fundamentally undervalued Pulse”.

Dental restoratives manufacturer SDI Limited (ASX: SDI) is another healthcare company currently overlooked by the market. SDI has managed to grow revenues by 52% in the 10 years to 2015 without the use of acquisitions and despite the fact that demand for its core amalgam products is on the wane as consumers seek more aesthetically pleasing alternatives.

This growth hasn’t always flowed to the bottom line as the company was adversely affected by the strong Aussie dollar and high silver prices at the start of this decade. Most of SDI’s sales come from overseas and silver is a key ingredient of amalgam fillings.

In recent years the company has invested heavily in developing glass ionomer and composite fillings and now has a number of these products on the market. SDI has received numerous awards for these cutting edge restoratives and their sales are more than compensating for the decline in amalgam.

Profit growth has now returned partly because of the weakening dollar, but also because non-amalgam fillings are higher margin products than amalgam ones. Also, the company will be less dependent on commodity markets in the future as glass ionomer and composite restoratives are not made from silver.

In a recent trading update, SDI announced that net profit after tax (NPAT) would be between $7.2 million and $7.8 million for 2016. Using the midpoint of this guidance, the stock is trading on an undemanding price-to-earnings ratio (PER) of 11.

Pulse and SDI are both very small companies and so are probably only suitable for risk tolerent investors. If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Matt Brazier owns shares of Pulse Health Limited and SDI Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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